LEGAL RULING NO. 084

Income from a covenant not to compete in California, if severable from the
sale of other intangibles, is income from sources within California.

Taxpayer,
a nonresident, sold his stock interest in a California firm. Part of the consideration
received by taxpayer was for his covenant not to compete in California for a period
of ten years. Advice is requested whether the income from a covenant not to compete
in California constitutes income from sources within California.

Consideration
for a covenant not to compete in California, if severable from the sale of other
intangibles, is income from sources in California. If, on the other hand, the
consideration cannot be so segregated, the entire amount arises from the sale
of the asset; under such circumstances the sale of stock by a non-resident would
not be taxable in California.